S&P Global predicts that global tariff costs will reach $1.2 trillion by 2025, affecting consumers significantly. The company believes this is a conservative estimate, considering rising input costs and lower outputs, and views tariffs as taxes on supply chains. Tariffs are customs duties placed on specific imports to support local producers by making foreign goods more expensive. These protectionist measures often accompany trade barriers and import quotas to strengthen domestic markets.

Difference Between Tariffs and Taxes

Tariffs are paid upfront at entry points, while taxes are collected when a purchase is made. Importers pay tariffs, whereas taxes hit individuals and businesses. Economists disagree on how effective tariffs are. Some think they protect local industries and balance trade, while others argue they raise long-term prices and can spark trade disputes. Donald Trump aims to use tariffs to boost the US economy and reduce personal income taxes, focusing on imports from Mexico, China, and Canada. These countries were significant sources of US imports in 2024. This approach is part of his campaign for the 2024 election. As global tariff costs are set to reach $1.2 trillion in 2025, consumer prices and corporate profits are already feeling the effects. The latest CPI report from September reveals inflation at 3.8%, indicating that many of these new costs are being passed along. Companies are under pressure on their supply chains, effectively creating a tax environment for their operations.

Market Jitters and Economic Indicators

In response, major retail and automotive companies are lowering their fourth-quarter earnings forecasts due to rising input costs. Traders should think about buying protective put options on indices like the S&P 500 or specific sector ETFs that are highly connected to Chinese and Mexican imports. This strategy can provide a safeguard against the anticipated drop in corporate profits as we move into the new year. This atmosphere of trade uncertainty is causing market anxiety, reminiscent of the trade disputes in 2018-2019, when the VIX would often rise above 20. With the VIX index currently around 19, we think it could go up further as retaliatory tariff announcements become more frequent. Long positions on VIX futures or buying VIX call options may be profitable as traders account for increased risk. Ongoing inflation is compelling the Federal Reserve to stick with its aggressive policies, strengthening the US dollar. The US Dollar Index (DXY) has been steadily increasing, now trading around 106.5, as high interest rate expectations persist. There’s an opportunity to use currency derivatives to bet on ongoing dollar strength against the currencies of major trading partners under scrutiny. Considering the inflation data, the derivatives market now anticipates over a 50% chance of another Fed rate hike in December. Traders should prepare for higher short-term interest rates using SOFR (Secured Overnight Financing Rate) futures. It’s also essential to keep an eye on the yield curve, as more rate hikes could deepen its inversion and signal an upcoming economic slowdown. Create your live VT Markets account and start trading now.

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